Local currency funding a possibility in Africa, says Standard Bank

The recent depreciation of currencies of oil and coal export-reliant countries in Africa has brought into focus the continued viability of commercial tenants being charged dollar-indexed rentals by foreign developers, when tenants’ income is based in local currency.

“This calls for a rethink. Tenants cannot realistically be expected to indefinitely absorb this level of currency depreciation. Some currencies, such as the Ghanaian Cedi, have depreciated by as much as 50% in the last year, and this trend is expected to continue as the dollar strengthens,” said Mr Zeelie. With anchor tenants “pushing back” on long term leases, developers may be faced with higher vacancy rates as a result he said.

Developers have traditionally steered clear of local currency debt for developments. Reasons for this have been higher interest rates which affect the cash flow of projects, resulting lower gearing and difficulties in hedging for the long term, all of which have an impact on the viability of a project. However, it is feasible to structure cash flows so as to retain commercial gearing levels and viable project cash flows. Central banks are also increasingly looking at projects being funded in local currencies as they want to develop their local capital market.

“This trend is imminent and developers should prepare sooner rather than later for local currency funding,” said Mr Gain.

A case study was presented which demonstrated that some local currency loans worked out cheaper than dollar loans as a result of currency depreciation. Currency risk can be further mitigated through the use of various hedging strategies.

As the hedging market in African currencies continues to develop, Mr Zeelie suggested that a realistic solution lies in hybrid currency loans.

With a presence in 20 African countries, Standard Bank is able to provide funding in local and foreign currency, and structure solutions that can assist in mitigating the currency risk which developers face.